NVCA: Everyone Wins with SBIR-VC Combo –

While Hollywood has used boxing to tug at our heartstrings in recent months, purists will tell you that nothing in sport approaches the beauty of a classic one-two combination. They would, however, agree with Ron Howard on at least one point: A boxer without desire might as well fight with one arm tied behind his back. Sadly, many startups face a similar handicap-not from a lack of desire, but rather from a lack of understanding on the part of some policymakers on Capitol Hill.

At issue is the potent one-two punch of the SBIR program and venture capital. Historically, this combination of financing has enabled many promising companies to conduct groundbreaking scientific research and simultaneously build viable businesses to bring innovations to market. However, changes in the interpretation of SBIR grant eligibility have prevented many small companies that receive venture financing from also receiving SBIR grants. This dynamic has hobbled young companies across the country, particularly in the life sciences sector. In fact, several such companies have had to shelve research projects, lay off scientific teams or scale back operations.

Two fundamental misconceptions appear to be driving this new interpretation of SBIR, in which companies that are 51% owned by venture capital firms are denied grants. The first is a relatively familiar one: the myth that a company that receives venture capital has hit the lottery and no longer needs government funding. This misconception persists due to confusion about the respective roles of venture capital funding and basic R&D funding.

Basic research funding is targeted at discovery and invention, which the SBIR program was designed to support. Venture capital dollars are then applied later in the life cycle to build strong and viable businesses through which promising discoveries can be brought to market. Thus, these sources function neither redundantly nor exclusively, but rather in critical concert to bring innovation to the marketplace.

The second misconception is that the venture capital industry is merely regional in impact, rather than national. Subscribers to this myth argue that granting SBIR funds to venture-backed companies unfairly favors those regions with thriving venture communities, while penalizing regions whose communities are still developing.

Though well meaning, this argument is misinformed and the antidote misapplied: Venture capital is a national phenomenon with national impact. In addition, and somewhat ironically, the current SBIR eligibility rule actually hurts the very low-tech regions it is trying to support. In these regions, numerous venture firms often must join together to fund a promising startup, as a single local firm may not have the resources to fund a company fully. As each firm takes an equity stake in the company, the total venture ownership quickly rises above the 51% threshold.

These misconceptions have obscured venture capital’s track record in bringing life-saving innovations to the public. Medical devices such as the pacemaker, the MRI and the pulse oximeter were brought to market through venture capital investment, as were the pharmaceuticals Enbrel (arthritis), Herceptin (cancer), and Integrilin (heart disease).

More importantly, however, these misconceptions have handicapped a proven, longstanding and symbiotic relationship between venture capital and the SBIR program. That is why the NVCA supports allowing venture-financed companies to once again compete for SBIR grants. Doing so will reopen the SBIR program to the broadest and most qualified base of small businesses as possible and ensure that innovations like those listed above continue to reach the public.

While the SBA has held an ongoing series of hearings on issues pertinent to SBIR, the NVCA believes the quickest and the most effective solution is to pass bipartisan legislation recently introduced in both the Senate (S. 1263) and House of Representatives (H.R. 2943) which amends the Small Business Act by clarifying the SBIR grant eligibility requirements for venture-backed startups. The legislation would allow any business that is at least 51% owned and controlled by one or more individuals and/or venture capital firms to participate in the program (although restrictions on the size and respective stakes of the partners would remain).

Mark Heesen is President of the National Venture Capital Association.